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Dave Carlsen doesn't like it when people refer to his fund, Buffalo Discovery, as a technology fund. That's just too nerdy. It's also why he changed its name from Science and Technology two years ago. Names can be restrictive.

"Technology is so much broader than the current narrow definition, which usually refers to information technology and social media," Carlsen says. "Technology is much more than a good idea. It's the commercial application of those good ideas that ensures growth," says the manager, 45. "In the old days, technology meant steam and railroads. Today, it can just as easily be energy."

Carlsen attributes his fund's success—it has returned 28% annually over the past five years, beating 93% of other mid-cap growth funds, and 11% over the past 10, beating 84%—to his go-anywhere approach. Though the portfolio mainly consists of midsize companies (with an average market value of $7.3 billion, smaller than the category's average of $8.4 billion), Buffalo Discovery defines itself as an all-sizes fund specializing in innovation. "We like to buy small companies before they get discovered, and hold them for a long time," explains Carlsen.

Carlsen came to Buffalo funds in 2004 after spending his early years in the money-management business in Madison, Wis., about 300 miles south of the old lumber town where he grew up. A graduate of the University of Wisconsin, Carlsen worked for Wisconsin business professor Stephen Hawk at Northern Capital. Professor emeritus Hawk remembers Carlsen developing from an office runner into a fine analyst. "He's a classic Midwesterner, very motivated, dedicated, confident in his work, and nice," Hawk says. "He's not the kind of guy who just reads analysts' reports and accepts received wisdom."

Carlsen looks for "disruptive" businesses that develop new ideas, products, distribution, or brands. He is part of a three-person team formed when he first arrived in 2004. Clay Brethour focuses more on industrial and energy companies, while Elizabeth Jones, a medical doctor, favors biotechnology and pharmaceutical companies. Carlsen himself focuses mainly upon financial services and information-technology firms—roughly 50% of the fund. Though they each have a specialty, two of the three must agree on all buying and selling decisions. The fund's turnover is just 53%, meaning about half of its portfolio changes every year, much slower than the typical technology fund, which has a turnover of 131%.

Carlsen begins his process with a screen for growth—he starts with 12,000 companies and screens for those raising revenues and profits by at least 10% per year, three times the current estimate for U.S. gross-domestic-product growth. That narrows the universe down to 800. Then comes the technology and innovation part of the process: Carlsen, Brethour, and Jones look at each business in terms of its industry and in the context of broader trends. They look for businesses that can grow quickly, and without much additional expense. Discovery winds up with about 220 companies on its watch list, which is whittled to 70 stocks. The managers derive the best- and worst-case scenarios for each over the next five to seven years; Carlsen favors those whose best-case scenario is at least twice as good as its worst-case.

The fund's picks are all expected to benefit from important long-term trends that Carlsen's team has identified—for instance, technology's influence in the health-care sector, particularly when it comes to managing the cost of care. Hospira's inexpensive generic drugs and innovative delivery systems for injectable medication have enabled it to become among the world's largest distributors of generic injectable medicine. The firm, which has a $7.1 billion market value, fits Carlsen's criteria in another important way: Hospira's business comes with formidable barriers to entry, since injectable drugs are difficult to make and highly regulated.

Similarly, top holding
Align TechnologyALGN -1.4836523491162195%Align Technology Inc.U.S.: NasdaqUSD53.785
-0.81-1.4836523491162195%
/Date(1427835600288-0500)/
Volume (Delayed 15m)
:
783564AFTER HOURSUSD53.72
-0.0649999999999977-0.12085153853304825%
Volume (Delayed 15m)
:
50980
P/E Ratio
29.880555555555556Market Cap
4406908565.17944
Dividend Yield
N/ARev. per Employee
212668More quote details and news »ALGNinYour ValueYour ChangeShort position
(ALGN) is making the torment of metal dental braces passé. Align makes clear, almost invisible, rubberized mouth liners created from digital scans of a patient's mouth. It has opened up the market for braces to a wider percentage of the adult population who would normally be averse to braces, while also appealing to teenagers. What's more, dentists like Align's braces because they require less adjustment—and less chair time—making for fewer and shorter visits. The $4.3 billion company has enjoyed surprising revenue growth both in North America, its main market, and abroad. Revenue growth for its North American business, which accounts for 75% of sales, rose 13% last year, while sales in Europe were up 20%.

Buffalo Discovery Fund

Total Returns*

1-Yr

3-Yr

5-Yr

BUFTX

37.7%

17.0%

28.1%

S&P 500

26.0

14.3

22.2

% Of

Top 10 Holdings

Ticker

Portfolio**

Align Technology

ALGN

3.1%

Hospira

HSP

3.0

Chart Industries

GTLS

2.7

Apple

AAPL

2.6

Carbo Ceramics

CRR

2.4

Accuray

ARAY

2.1

Facebook

FB

2.0

PerkinElmer

PKI

2.0

Gilead Sciences

GILD

1.9

Actavis

ACT

1.9

Total:

23.7%

*All returns are as of 02/26; three- and five-year returns are annualized. ** As of 12/31/13. Sources: Buffalo Funds; Morningstar

Greater Internet accessibility increases the value of services like Facebook, which can then attract more advertising. Total online advertising amounts to $115 billion today, and is expected to grow to $230 billion in five years. Facebook's share of that, now 7%, could double to 14%, Carlsen says, producing annual revenue of $32 billion in five years, a compound growth rate of more than 30%. He bought and immediately sold Facebook at its initial public offering, then bought his current stake at $20. Facebook is still among the fund's top holdings, though Carlsen has been selling recently, as the stock closes in on his target of $78.

Chart IndustriesGTLS -0.18497438816163916%Chart Industries Inc.U.S.: NasdaqUSD35.075
-0.065-0.18497438816163916%
/Date(1427835600145-0500)/
Volume (Delayed 15m)
:
238712AFTER HOURSUSD35.078
0.003000000000000110.008553100498930863%
Volume (Delayed 15m)
:
9403
P/E Ratio
12.99074074074074Market Cap
1072859326.1911
Dividend Yield
N/ARev. per Employee
220631More quote details and news »GTLSinYour ValueYour ChangeShort position
(GTLS), a manufacturer of equipment that turns gas into liquid to make it easier to transport, can't keep up with demand. The introduction of hydraulic-fracturing technology has caused a boom in drilling, particularly in North Dakota's Bakken Shale formation. The liquefaction of natural gas is needed for transporting it for use in urban areas, as well as exporting to other countries.

Now at $84 per share, with a market value of $2.5 billion, Chart shares could hit $125, Carlsen says, adding that it's the only publicly traded company so directly tied to the natural-gas liquids build-out.

The innovators are out there. Like Carlsen says, it's a matter of discovery.